Social Security Needs Growth, Not Cuts.

Having deliberately ignored the issue of entitlement costs in its 2012 Budget, the Obama Administration is holding its breath to see if the Republicans will fall into the trap and propose unpopular changes to Social Security. The GOP should not take the bait.

Social Security needs more substantial economic growth — not tax hikes, benefit cuts or increases in the retirement age. Opinion polls show that the voters understand this. They oppose changes in the Social Security program by wide margins. The question now is whether the Republican leadership can figure this out before they do something that would cost them dearly in 2012.

Right now, there are many voices predicting financial doom for Social Security. All of these gloomy projections are based upon GDP growth rates over the next 75 years that are much lower than what has been “normal” for America. Over the 75 years ending with 2010, the U.S. economy grew at an average real annual rate of 3.71%. Despite this, the CBO is forecasting growth over the next 75 years of only 2.16%, and the Social Security Trustees are projecting only 2.22% growth during this period.

An average annual real GDP growth rate of 3.5% would make all of the financial problems of Social Security disappear, with no tax increases and no changes in benefits. This also happens to be about the minimum required to get the U.S. back to full employment, and create the experience of “prosperity” for average Americans.

Tim Pawlenty, the former Minnesota governor and possible 2012 presidential candidate, has called for setting an explicit national goal for economic growth. This is an important idea, because it brings focus to the single most important economic issue facing the country. Pawlenty has not yet put forward a specific number, but when (and if) he does, it should be 3.5% or higher.

So, what is so special about 3.5% real growth? Every year, the Social Security Trustees issue a report on the financial health of Social Security. By comparing the projections contained in the 13 annual reports from 1998 through 2010, it is possible to discern what real GDP growth rate is required to keep Social Security solvent.

In their 1998 report, the Trustees projected that Social Security outlays would exceed dedicated payroll tax revenues in 2013, which was then 15 years away. They also projected that the Social Security Trust Fund would be exhausted in 2032, 34 years from the time of the report.

In the report that came out five years later, in 2003, the Trustees projected that the year that costs would surpass tax receipts was still 15 years away (2018). In addition, Trust Fund exhaustion had moved out 10 years, to 2042, then 39 years in the future.

What happened between the 1998 and 2003 reports? Fast economic growth happened. Real GDP growth for 1998 – 2002 averaged 3.2%, which was higher than the Trustees had expected.

Fast-forward five years to the 2008 Social Security report, and the Trustees were projecting that Social Security would go into the red in 2017, which was then only nine years away. They were also estimating that the Trust Fund would be gone by 2041, 33 years from then. Both dates were a year sooner than projected in the 2003 report. What had happened? GDP growth for 2003 – 2007 averaged only 2.7%, and this was not enough to prevent the financial condition of Social Security from deteriorating somewhat.

The economy actually contracted at a 1.3% average rate in 2008 and 2009, and this drove Social Security into a negative cash flow position in 2010, much earlier than the Trustees had ever imagined was possible. In their 2010 report, they projected that the Trust Fund would be exhausted in 2037, four years sooner than forecasted only two years before.

From this data, it is clear that it takes a real GDP growth rate of about 3.2% to stabilize Social Security’s medium-term finances. In other words, at 3.2% growth, “doomsday” moves back a year each year.

Of course, this means that it would take a real GDP growth rate higher than 3.2% to get Social Security’s cash flow back in the black, and to begin pushing back the year that the Trust Fund is exhausted. Economic growth of 3.5% would seem to be about the minimum required to accomplish this.

Another way to look at the financial position of Social Security is on a “present value” basis. If you plug the numbers from the 2010 Trustees’ report into a simplified model, you find that the present value over the next 75 years (PV75) of projected Social Security payments is about 20%, or $8.7 trillion, higher than the PV75 of Social Security payroll taxes.

An increase of 0.53 percentage points in economic growth over the 75-year period would bring average GDP growth up to 2.75% and would increase the PV75 of Social Security tax receipts by the required 20%. However, higher GDP growth means higher wages, and Social Security pension liabilities increase (with a lag) as wages increase. So, it would take a real growth rate higher than 2.75% to bring the system into balance. Once again, it appears that a growth rate of 3.2% would be enough to stabilize the program, and that 3.5% growth would provide a growing “cushion.”

America needs a sustained period of rapid economic growth to create the 25 million good, full-time jobs required to get the nation to true full employment. This “growth spurt” would, all by itself, restore Social Security’s finances to robust health. The Republicans should focus their efforts on producing at least 3.5% economic growth, and not fall into Obama’s trap by advocating Social Security benefit reductions.

Here is my response, there is a income cap on the social secuirty tax, once you make that income you stop paying social security tax for that year, it benefits the wealthy, but all studies show that if you removed the cap and social security was taxed on all income or the year, there would be no problem with social security as is for ever.

Very true. There is no reason someone with $50,000 income should pay 7% or 14% if self-employed and someone who makes $1 million per year should pay .7 percent. However, some kind of compromise is likely--a combination of raising the cap, rather than removing it, and increasing the retirement age a bit is likely from what I've been reading.

Olyhooch -- this is a well researched, well reasoned post. But it is really long. Why not make it into a HUB? (Just a suggestion).

The American people have spoken. We WANT Social Security.The Republicans need to do what they said they were gonna do when they were elected in 2010. Listen to the people and do the people's bidding. Said bidding does NOT include reducing or privatizing SS. It includes figuring out how to fund it.That's your challenge, folks. It's your JOB. Do it!

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